Valuation of a company, also known as business valuation, is the process of determining the economic value of a business or its assets. It is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company. Business valuation is also used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.
There are several methods to value a company, including:
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Market Capitalization: This is the simplest method of business valuation, calculated by multiplying the companys share price by its total number of shares outstanding.
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Book Value: This method involves calculating the companys book value using information from its balance sheet. To calculate book value, start by subtracting the companys liabilities from its assets to determine owners equity. Then exclude any intangible assets. The figure youre left with represents the value of any tangible assets the company owns.
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Discounted Cash Flow Analysis: This is a complex formula that looks at the businesss annual cash flow and projects it into the future and then discounts the value of the future cash flow to today, using a "net present value" calculation.
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Earnings Multiples: This method involves estimating the earnings of the company for the next few years and using a multiple of the companys earnings, or the price-to-earnings (P/E) ratio, to determine its value.
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Comparable Company Analysis: This method provides an observable value for the business, based on what other comparable companies are currently worth.
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Enterprise Value: This method involves adding a companys market capitalization to its debt and then subtracting its cash and cash equivalents.
The choice of valuation method depends on the company and/or the individual conducting the business valuation process.
